Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.

I am not convinced the problem originates in Smith, who was, I believe, embedded within Aristotelian ideas of reciprocity and justice, immediately before the section Pilkington quotes, Smith writes:

All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy. All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices.

Society MAY subsist without the basis of reciprocity, but its not going to be the best type of society. I believe Pilkington makes this point, but still seems to hold Smith responsible for us ending up as we have.

I believe the issue arises out of Romanticism, which placed greater emphasis on individuality and created the environment for both neo-classical economics and Marxism. The issue that economics, before the 1920s, Marxism and Graeber share is that they ignore uncertainty. If the world is uncertain, I argue that we need reciprocity love, gratitude, friendship, while if there is a 'certain' scarcity, individualism triumphs. I suggest that when faced with scarcity, society responds by fragmenting into elements that
compete for scarce resources. Alternatively, when society is challenged by uncertainty it
turns to communality, seeking to diversify risks. On this basis, the rise of expected utility
maximisation as dealing with scarcity in a Romantic context of the individual genius struggling
against nature and within a framework of stable chances, can be explained. I contend that
since the ‘Nixon shock’ society has been more focused on uncertainty than scarcity and is
struggling to shift the economic paradigm in response to this change in the economic
environment.

Arjun Appadurai captures this in arguing that the leading agents in modern finance

believe in their capacity to channel the workings of chance to win in the games
dominated by cultures of control …[they] are not those who wish to “tame chance”
but those who wish to use chance to animate the otherwise deterministic play of
risk [quantifiable uncertainty]”. [Appadurai, 2011, p 533-534]

These observations conform to the definition of a ‘speculator’ offered by Reuven and Gabrielle Brenner:
a speculator makes a bet on a mis-pricing. They point out that this definition explains why
speculators are regarded as socially questionable: they have opinions that are explicitly
at odds with the consensus ([Brenner and Brenner, 1990, p 91], see also [Beunza and
Stark, 2012, p 394]). In comparison, gamblers will bet on an outcome: an ace will be drawn;
such-and-such a horse will win against this field in these conditions; or Company Z will
outperform Company Y over the next year. Investors do not speculate or gamble, they defer
income, ‘saving for a rainy day’, wishing to minimise uncertainty at the cost of potential
profits.

Speculation in modern finance, as Daniel Beunza and David Stark observe, is about
understanding the relationship between different assets and “to be opportunistic you must you must
be principled, i.e. you must commit to an evaluative metric” [Beunza and Stark, 2004, p 372]. This
explains why modern finance relies on mathematics, “Mathematicians do not study objects, but the
relations between objects” [Poincaré, 1902 (2001), p 22].

The speculator has been a feature of the modern markets ever since they were established in the
seventeenth century. In 1719 Daniel Defoe described stock-jobbing in The Anatomy of ExchangeAlleyas

a trade founded in fraud, born of deceit, and nourished by trick, cheat, wheedle,
forgeries, falsehoods, and all sorts of delusions; coining false news, this way good,
this way bad; whispering imaginary terrors, frights hopes, expectations, and then
preying upon the weakness of those whose imaginations they have wrought upon
[Poitras, 2000, p 290 quoting Defoe]

The process described is speculation because the stock-jobbers are not betting on outcomes, rather they
are attempting to change the expectations of others, create a mis-pricing that they can then
exploit.

The philosophical antecedents of the modern hedge fund manager, betting against determinism,
could be even further back, in the medieval Franciscans such as Pierre Jean Olivi and John DunsScotus. While the Dominican, empirical rationalist, Aquinas argued that knowledge rested on reason
and revelation, Scotus argued that reason could not always be relied upon: there was no true
knowledge of anything apart from theology founded on faith. While Aquinas argued that God could
be understood by rational examination of nature, Scotus believed this placed unjustifiable
restrictions on God, who could interfere with nature at will: God, and nature, could be capricious
[Luscombe, 1997, p 127].

Appadurai was motivated to study finance by Marcel Mauss’ essay Le Don(‘The Gift’),
exploring the moral force behind reciprocity in primitive and archaic societies. Appadurai notes that
the speculator, as well as the gambler and investor, is “betting on the obligation of return”
[Appadurai, 2011, p 535]. The role of this balanced reciprocity in finance can be seen as an axiom in
that it lays the foundation for subsequent analysis, it can also be seen as a simplifying
assumption: if the future is uncertain what mechanism ensures that agreements will be
honoured. David Graeber also recognises the fundamental position reciprocity has in finance
[Graeber, 2011], but where as Appadurai recognises the importance of reciprocity in the presence of
uncertainty, Graeber essentially ignores the problem of in-determinism in his analysis that
ends with the conclusion that “we don’t ‘all’ have to pay our debts” [Graeber, 2011, p
391].

Aristotle’s Nicomachean Ethicsis concerned with how an individual can live as part of a
community and he saw reciprocity in exchange as being important in binding society together
([Kaye, 1998, p 51], [Aristotle, 1925, V.5.1132b31-34]). According to Joel Kaye, this means that
Aristotle took a very different view of the purpose of economic exchange, it is performed to
correct for inequalities in endowment and to establish a social equilibrium and not in
order to generate a profit. This view is at odds with that taken by mainstream modern
economists, or even anthropologists such as Graeber, who seem to be committed to a
nineteenth century ideal of determinism and so can ignore the centrality of reciprocity in
markets. I argue that in the presence of uncertainty, society needs reciprocity in order to
function.

Reciprocity and fairness are linked, and the importance of fairness in human societies is
demonstrated in the so–called ‘Ultimatum Game’, an important anomaly for neo-classical economics
[Thaler, 1988]. The game involves two participants and a sum of money. The first player proposes
how to share the money with the second participant. The division is made only if the second
participant accepts the split, if the first player’s proposal is rejected, neither participant receives
anything. The key result is that if the money is not split ‘fairly’ (approximately equally)
then the second player rejects the offer. This contradicts the assumption that people are
rational utility maximising agents, since if they were the second player would accept any
positive payment. Research has shown that chimpanzees are rational maximisers while
the willingness of the second player to accept an offer is dependent on age and culture.
Older people from societies where exchange plays a significant role are more likely to
demand a fairer split of the pot than young children or adults from isolated communities
([Murnighan and Saxon, 1998], [Henrich et al., 2006], [Jensen et al., 2007]). Fair exchange
appears to be learnt behaviour developed in a social context and is fundamental to human
society.

The relevance of the Ultimatum Game to the argument presented here is that separates the
Classical themes of fairness and reciprocity from the Romantic theme of Darwinian ‘survivial of the
fittest’. In An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776,
Adam Smith, working in the Classical framework, argues that humans are distinctive from other
animals in the degree to which they are co-operative

Nobody ever saw a dog make a fair and deliberate exchange of one bone for another
with another dog. [Smith, 1776 (2012), Book 1, Chapter 2]

Humans , on the other hand, exhibit

the propensity to truck, barter, and exchange one thing for another. [Smith, 1776
(2012), Book 1, Chapter 2]

Markets are not simply a technical tool to facilitate life, but they capture a key distinction between
humans and other animals. This is observation is very different to Darwin, who wrote in The Descentof Manin 1871,

My object in this chapter is to shew that there is no fundamental difference between
man and the higher mammals in their mental faculties. [Darwin, 1871, p 36]

Darwin would go on to note that

the weak members of civilised societies propagate their kind. No one …will doubt
that this must be highly injurious to the race of man [Darwin, 1871, p 168]

and to argue that society should control this process within the ethic of Consequentialism. Darwin did
acknowledge that ‘survival of the fittest’ did not explain the ‘nobler’ aspects of civilisation
[Darwin, 1871, p 161–167], but his arguments are integral to the ‘social Darwinism’ of Spencer and
Galton that explained how the ‘best’ became the ruling. Darwinian metaphors are still a powerful
feature of the paradigm centred on neo-classical economics and Consequentialist Ethics and
the Ultimatum Game, and the concept of fairness, is an anomaly for the whole of this
paradigm.

I conject that balanced reciprocity should be an axiom of exchange, possibly in preference to
the axiom that the aggregate demand price is equal to the aggregate supply price [Keynes, 1936, Ch
2, VII], or that a price is the cost of labour and a risk premium (e.g. Duns Scotus [Kaye, 1998, p
140], Smith, Marx). Reciprocity is anterior to the concept of justice, in particular the
argument for justice and fairness as being essential components in commerce follow Aristotle’s
arguments for how people, in a state based on egalitarianism, can live together in an urban
society.

Before the nineteenth century, scholarship would be conducted in the context of medieval Virtue Ethics: the four
‘Pagan’ or ‘Cardinal’ virtues; Courage (Fortitudo); Justice (Iustitia); Temperance (Temperantia);
and Prudence(Prudentia), which originated in Nicomachean Ethics, and three ‘Christian’ virtues;
Hope (Spes); Faith (Fides); and Charity (Caritas). Medieval scholars approached morality
using the same framework that they used to study physics or medicine by blending four
elements, or humours, in the right manner. For example, Charity and Faith yield loyalty,
Temperance and Courage give humility and Justice, Courage and Faith result in honesty
[McCloskey, 2007, p 361]. An ethical life was one that exhibited all, not just some, of the
virtues, and a merchant, by demonstrating them, could be seen as being as virtuous as a
prince or a priest. This was not just a Latin Christian view, the first century Mahayana
Buddhist Vimalakirti Sutratells the story of how a virtuous merchant teaches kings and
monks.

Following the analysis of Nicomachean Ethicsmedieval scholars, like Aquinas and Olivi, placed
the virtue of Justice at the centre of commerce. Prudence is the common sense to decide between
different courses of action, it is at the root of reason and rationality and can be seen as the
motivation for all science. This virtue is the one most closely associated, in the modern mind at
least, with effective merchants. Temperance, a word that comes into English with Grosseteste’s
translation of Ethics, is the virtue least associated with modern bankers. However, the
modern understanding of temperance as denial or abstinence is not only how a medieval
friar would have understood the virtue. The word is related to ‘temper’ and is concerned
with getting the right balance between the virtues. A good merchant would exhibit the
virtue by mixing Courage, to take a risk, and Prudence, allowing for the unforeseen, and
diversifying.

Faith is the ability to believe without seeing, and was central to Olivi’s whole philosophy. The
Latin root is fides captures the concept of trust, the very essence of finance exhibited by the
“promise to pay”. While Faith is backward looking, you build trust, Hope is its forward-looking
complement. Charity, along with Temperance, is the virtue least likely to be associated with
merchants. While we now think of charity in terms of giving to others, in the past it was associated
with a love, or care, for others. Shakespeare’s play The Merchant of Veniceis about ‘Antonio, a
merchant of Venice’ who characterises Charity, or agape, though his sacrifices for his young
friend Bassanio. The view that Antonio and Bassanio were physical lovers is a modern
interpretation that does not distinguish storge (familial love, the deficit Jessica/Shylock), philia
(friendship, Portia/Nerissa, Lorenzo/Bassanio), eros (physical love, Portia/Bassanio,
Lorenzo/Jessica) and agape (spiritual love, Antonio/Bassanio, Shylock’s deficit), clear
themes running through the play. We would suggest that the problem Graeber should be
tackling in his discussion of debt is not the presence of reciprocity but rather the absence of
Charity.

References

A. Appadurai. The ghost in the financial machine. Public Culture, 23(3):517–539, 2011.

8 comments:

Wonderful post, and much appreciated! I would just like to add that in addition to uncertainty, another factor in the mythologizing of individualism is the loss of kinship communities, in which individualism is(generally)seen to be a losing strategy compared to interdependence.

While I fully agree with your remarks regarding Adam Smith (and I reject Pilkington's attempt to pinpoint an individual as single-handedly responsible for the current exaggerated view of individualism), I, frankly, have difficulty seeing the relationship between Romanticism/uncertainty, at one hand, and "economics before the 1920s"/Marxism/Graeber and individualism, at the other.

That is so because, although most of classical economics (including Marx) was developed during the Romantic period (19th century), neither the notion of individualism as central feature of human condition start with Romanticism, nor can Romanticism be unequivocally identified with the exaltation of individuality.

Enlightenment philosophers, working decades before Romanticism, eventually found political expression in the Declaration of Independence of the USA (1776) and the French Universal Declaration of the Rights of Man and Citizen (1789), also before the Romantic period. Both documents clearly depict individualism as key element of a desirable social order.

Further, nationalism is also a feature of Romanticism. Think for instance of Richard Wagner and his Germanic/Nordic-themed works (and let's remember that the German unification also took place during this period). Clearly, nationalism seems a priori largely opposed to individualism. Orientalism (say, as manifested in Madame Butterfly) has little to do with individualism, and yet, it is also a prominent feature of some Romantic works.

So we have that the exaltation of individuality precedes Romanticism and Romanticism cannot be equated exclusively with the exaltation of individuality, anyway. Why should it be considered a definite influence on Marxism and "economics before the 1920s"? After all, Romanticism makes a very good sense when applied to art and literature; the connection seems much more tenuous when extended to other spheres.

Regarding uncertainty, while it's true that, to the best of my knowledge, it doesn't play a big role in classical economics (I can't say anything more definite, as I am not an authority on this subject), Graeber does emphasize the importance of mutual obligations out of solidarity, regardless of what his intellectual influences might be and regardless of how he considers uncertainty.

However, the point about scarcity, particularly with respect to main stream economics, seems, to me, much more promising.

I agree that the emergence of individualism pre-dated the height of Romanticism, and the Enlightenment had the concept of autonomy. I would suggest that the Romantics did place greater emphasis on individuality, for example the criticisms of the National Academies and the emphasis on individual emotional reactions to phenomena. In addition, the concept of the individual "genius" emerges during the Romantic period (which some argue started in 1755 with the Lisbon Earthquake).

Atomism emerges in the Romantic period, and I see nationalism as a form of atomism. It broke up sovereign states, established in the seventeenth century, into nation states.

Romanticism had a significant impact on the physical sciences: Humboldt, Darwin, Lewis & Clark were all "Romantic Scientists", and Richard Holmes book "The Age of Wonder" presents a history of British Romantic science. Patricia Fara has written in a more scholarly manner on the impact of Romanticism on physical science.

Marx and Darwin, both writing in the midst of Romanticism, make a teleological, deterministic, argument: there may be "noise" in the system but their "scientific" analysis points to a definite future. Neo-classical economics before Knight and Keynes works within the same deterministic framework. I think any scholarship rooted in Marx, Darwin or neo-classical economics either implicitly accepts determinism or needs to address it explicitly. My criticism of Graeber is that he does not do this, and this leaves him open to criticism.

Tim, Can you explain these conclusions:1) I suggest that when faced with scarcity, society responds by fragmenting into elements that compete for scarce resources.2)Alternatively, when society is challenged by uncertainty it turns to communality, seeking to diversify risks.

Both are interesting assertions, but I don't follow the logic of arriving at them.

Also, what exactly is your point about determinism that Graeber needs to address? I don't see why determinism needs to be addressed in the context of reciprocity?

I think, again it is a belief not a theory, that reciprocity, the idea that debts are repaid, is a consequence of uncertainty. If there was no uncertainty we would not need the "moral" force of reciprocity

Ah interesting, I think perhaps reciprocity is also an erotic force. we are bound to people we reciprocate with in the same way we are bound to people we copulate with.We feel violated in the same way when the bond is breached in either relationship.

Money is like a marriage certificate.

Why do people cheat? I am skeptical it is due to uncertainty, but of course it is uncertain if and when people will cheat so I have to think about it.

I'll have to puzzle further on the idea that uncertainty leads to collaboration. Isn't conventional wisdom (at least in economics) the opposite? Its the individual acting each in her own self-interest (and obviously in uncertainty of how others will act) that magically allocates resources resulting in the impossible to improve upon market? And that trying to reduce the uncertainty through central planning (communal effort) is inferior, always and everywhere.

I am thinking about how the idea that individualism is the preeminent natural law needs to be beaten back. The communal has been so utterly demonized in the public debate. It is a trick now to say the obvious, but clearly collective action is often the best course of action. For example, now would be a handy moment to act collectively - through the government - to increase demand a little while so many resources remain idle. But is this not happening because there is not enough uncertainty to drive communal action?

While in contemporary economics the conventional wisdom is that the self-interested individual will resolve problems, I don't think this has always been the case. I think it entered into economics in the 1830s with Mill, and it was not in Smith. I associate the change in approach with Laplace's replacement of randomness by ignorance (a scarcity of data), this is discussed at some length in my SSRN paper http://papers.ssrn.com/abstract=2159196

On the erotic aspect, the Merchant of Venice can be interpreted as a discussion of the four forms of love (friendship, family, erotic and "agape" or "charity"). For example, there is the erotic love between Portia and Bassanio and Jessica and Lorenzo, friendship between the servants and Lorenzo and Bassanio, a deficit of familial love between Jessica and her father Shylock. What is intriguing is the personification of the "highest form of love", charity, is in Antonio, "The Merchant of Venice", which is contrasted to Shylock's lack of charity.

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About Me

I am a Lecturer in Financial Mathematics at Heriot-Watt University in Edinburgh. Heriot-Watt was the first UK university to offer degrees in Actuarial Science and Financial Mathematics and is a leading UK research centre in the fields.

Between 2006-2011 I was the UK Research Council's Academic Fellow in Financial Mathematics and was involved in informing policy makers of mathematical aspects of the Credit Crisis.